Ulster Bank remains the missing part of the RBS story.
Today’s RBS results mean that a tiny bank at the edge of the RBS group – Ulster Bank – is responsible for the lion’s share of RBS’s losses. This enormous loss from bad lending in Ireland means that RBS has also been the vehicle for an unintended British bailout of the Irish state.
With losses of £4.5bn last year, Ulster Bank was the largest contributor to today’s announcement of RBS’s £8.2 bn of losses. It is also the black hole for the majority of RBS’s losses since nationalisation. Losing money every year, it has racked up an eye watering £16.6 bn of losses (operating losses plus non-core impairments), a number that exceeds the often-reported £14 bn taxpayers’ paper losses.
That a small bank – only £60 bn balance sheet in 2008 – could rack up such a huge loss exemplifies the problem with bank audit identified by the Tyrie Commission. Why are these enormous losses still coming through five years later?
It also challenges our confidence that ring fencing will make UK banks safer. Nothing in the ring fence prevents another British ring-fenced bank racking up similar bad loans in other Eurozone countries that would result in them collapsing back on the British taxpayer. The cost of this Eurozone bad lending is clear from the dramatically better performance of RBS’s other divisions.
Since 2008, RBS’s UK business made £14.7 bn of profits (operating plus non-core impairments), which explains RBS’s focus on the UK going forward. RBS’s global markets and banking also generated £9.5 bn of operating profits since 2008 – the most of any division – but this was balanced by an equal amount of losses that are the legacy of aggressive pre-crash international lending.
RBS clearly has a franchise in investment banking, but the disconnect between legacy losses and ongoing bonus levels lies behind today’s angry headlines and presents a challenging decision for management. These stories will all be running today, but in fact Ulster Bank remains the missing part of the RBS story.
The tale of RBS is the accidental British bailout of the Irish state. The Irish government guaranteed Ulster Bank’s depositors on 9 October 2008, putting Irish taxpayers on the hook for the losses rather than the British taxpayers as RBS’s shareholders. However, Ulster Bank was not put into the Irish ‘bad bank’, NAMA, in 2009 because at that time its losses were quite small.
It was only a year after NAMA was set up that the losses in Ulster Bank began to soar. The decision not to put Ulster Bank into NAMA will have been based on the accounts of Ulster Bank in 2008 and 2009, which means the audit should be under much greater scrutiny. But the consequence was that Ireland avoided a further ten percent increase in Irish national debt – currently at £147bn – that would have turned Ireland’s austerity recovery story into a Greek tragedy.
This unintended bailout of Ireland using RBS is not without irony.
RBS started life as a financialisation of relationships between the four nations of these islands. Its initial capitalisation was the debentures issued as a bailout for Scottish investors contained in Article 15 of the Act of Union of 1707. It ‘s a twist of fate that its eclipse arose from an unplanned bailout of Irish depositors three hundred years later.
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